Trend Check with Tushar Chande

Small Cap Stocks Show Significant Weakness

Small cap stocks have broken down in a noteworthy way, as the down-move I anticipated roils the market. Typically, weakness in small cap stocks is an early warning of weakness in their larger cousins.  First, a majority of stocks in the S&P 600 Small Cap Index have turned lower in all four of my trend following models (see Chart 1).  Second, $SML, the Small Cap index has broken below its 200-day simple moving average (see Chart 2).  Third, the broader Russell 2000 Index has also reached its 200-day simple moving average (see Chart 3).  All three, taken together, point to significant weakness in the small cap area.  Now, the question is whether the weakness will spread elsewhere.

Chart 1: All four of my trend-following models show a majority of stocks in the small cap index trending lower, which means the underlying small cap universe is turning lower.  These calculations are supported by charts 2 and 3 below.

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Do Large Down-side Gaps In Leadership Stocks Point to Start of Mini Correction?

A change in sentiment is now evident, as profit-taking has opened up down-side gaps greater than 10-day average true range in the charts of key leadership stocks (such as Amazon and Coherent) starting a mini correction as measured by the Guggenheim Equal Weight ETFs: in the short-term only 4 of 9 equal weight ETFs are long, two are flat and two are trending lower.  The data are summarized in Chart 1.  Two sectors, Industrials (RGI) and Health Care (RTH) are in short-term down-ternds.  Two, Materials (RTM) and Technology (RYT) are flat.  Energy (RYE), Consumer staples (RHS), consumer discretionary (RCD),  financials (RYF) and utilities (RYU) are long.  Thus, a mini-correction has emerged.

Chart 1: A change in sentiment is visible over the short-term in the Guggenheim Equal Weight ETFs. Two are flat, two are short, and only five are long. (For details of the trend-following models, see here.)

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July 2017 Review: All Green, With a Small Divergence

My trend-following models are all green, across all four time frames and market breadth at month-end.  However, even as the Dow 30 made new highs over the past few days, other key indexes declined, and one has to watch if this divergence persists, because looking at all the positive July returns in the SPX since 1950, there is only a 24% chance that both August and September will be positive.

Chart 1: The trend-following models are bullish, across multiple time frames and market width varying from 30- to over 2000 stocks.


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Is Volume Expansion Necessary for a Successful Breakout?

Conventional wisdom has it that volume expansion must accompany price expansion in order for the price expansion to succeed, i.e., for the breakout to mature into a trend.  But is volume necessary for a successful price breakout? Does price follow volume?

A fish out of water illustrates the necessity of water for fish to live. If there is no water then, then there is no fish (Is water? = False results in Is fish? = False).  For us, does Is Volume? = False always mean Is Trend? = False?  (Photo courtesy

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Can this Reslient Market Rally Continue?

This remarkably resilient market is closely following the post-election path I calculated in April.  The rally goes on despite going more than a year without a  5-percent dip, strange headlines, central bank policy changes and the largest (-20%) underweight allocation by top managers since 2008. Is it really that bad?  Can this rally continue?

Chart 1: The current market rally is closely following the average of the historical performance during administrations identified in the chart.  The market has shrugged off headline risk and central bank actions during its ascent.  An separate calculation shows that there is a 78% chance of positive second-half returns.

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Investing Tips from Warren Buffet's 2016 Purchase of Apple

Last week I wrote about buying a pull-back from recent highs. Here I will discuss buying a mega pull-back. In a bid to learn from the best, I studied the Berkshire Hathaway entry setup for Apple.  Naturally, I only looked at the technical set up from the charts, since I have no idea what factors were actually used to enter the position.   Was the purchase a pure value play, or simply buying growth at a reasonable price?  If you are interested, you will find a lot written about the fundamental factors used in Warren Buffet's decisions, but I have found no technical analysis of his entry process.  Of course, if you have seen technical analysis of his entries, I would love to hear from you.


Was the Berkshire purchase of Apple a pure value play or an example of buying growth at a reasonable price?

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Has Gold Broken Head and Shoulders Pattern Neckline?

The SPDR Gold Shares ETF (GLD) seems to have broken a head-and-shoulders pattern neckline, and spent several days below that neckline, suggesting that the pattern has been "definitively" broken.  Gold's correlation to bonds has slipped a bit.  The Chande Trend Meter is below 20, implying trend-following models detect a down-trend.  What is the projected downs-side target, and will GLD get there?


Chart 1: GLD the Gold Shares SPDR ETF shows a clear head-and-shoulders pattern, pointing to a down-side target in the 109-110 range. Observe that the Chande Trend Meter is below 20, implying a down-trend, and the correlation to bonds has slipped. Will GLD go down all the way to the target? (A live chart is here.)

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Back to Basics: Understand the Duration of Your Bond ETF or Bond Clone

The declines in global bond markets this week points out the need to be aware of your bond ETFs duration, which measures the sensitivity of the bond or ETF to changes in interest rates.  Duration is expressed in years, and the longer the duration, the greater the change in the price of the bond (or bond ETF) for a given change in interest rates.  You may also own bond clones, or ETFs which are closely linked to the bond market, such as an ETF with utilities.  Since such funds have stocks, there is no way to  know their effective duration.  I looked at the universe of Vanguard bond ETFs to illustrate the effect of bond duration, as well as to estimate the effective duration of bond clones.  As central banks work to nudge rates higher, you should be aware of the duration of your bond portfolio. 

Chart 1:  The duration of the Vanguard bond ETFs versus their recent performance, with declines increasing with longer duration. The key to symbols is shown below.

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Jim Cramer's Secret Stock Picking Method (With ScanCode)

I was shocked, yes shocked, when the energetic Mr. Cramer revealed his secret stock selection method on CNBC.  Naturally, this was too good an opportunity not to code it immediately into the StockCharts scan engine.  However, you will run into the usual problems of running a mechanical scan versus Cramer's discretionary entry process. Anyway, here it is.  Now, why was I shocked? Well, more on that later.


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78% Chance of Positive Second Half Returns

I looked back on historical S&P 500 returns since 1950 to study H2 performance (return over the second half of the year) given a positive performance over the first half (H1) of the year, and the data are encouraging.  There is a 78% chance of positive second-half (H2) returns in 2017, now that we have positive returns over the first half (H1) of the year (see Chart 1).  Overall US economic activity, as measured by the Chicago Fed National Activity Index is positive, and supportive of higher equity prices (see Chart 2).

Chart 1: Since 1950, when H1 returns were positive, H2 returns were also positive 78% of the time (36/46 occurrences).

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